All about bailouts and struggling consumers

Wednesday

Nov 26, 2008 at 2:00 AM

Amid populist discontent about financial bailouts targeting Wall Street and banks, government relief programs announced yesterday also appear at first glance to take a trickle-down approach, with the financial system first in line for help.

THE ASSOCIATED PRESS

Amid populist discontent about financial bailouts targeting Wall Street and banks, government relief programs announced yesterday also appear at first glance to take a trickle-down approach, with the financial system first in line for help.

But a closer look reveals the new programs are aimed squarely at Main Street. Unlike Sunday's bailout of Citigroup Inc., this time the money is expected to flow to average people, through less expensive and more readily available consumer and automobile loans as well as new or refinanced mortgages.

Here are some questions and answers about bailouts and struggling consumers:

Q: Where's the money going in the latest bailouts?

A: The government's newest packages total $800 billion.

The Federal Reserve will pay up to $100 billion to take over debt held by mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. The Fed also will buy $500 billion in mortgage-backed securities — pools of mortgages that are bundled together and sold to investors, and backed by government-sponsored enterprises like Fannie and Freddie.

Q: So isn't that money essentially going to Wall Street, rather than me — just like the other bailouts we've seen?

A: Yes and no. While institutions will directly see the money rather than individuals, those institutions make up the foundation on which consumer access to credit is built.

For example, Fannie Mae and Freddie Mac buy mortgages on the secondary market — they acquire existing mortgages from lenders, so those lenders can in turn make additional loans, spreading risk and making more money available to borrowers.

That's how it's supposed to work. But fears about the financial system and Fannie and Freddie's health have made mortgage rates unusually volatile. Borrowing costs haven't sufficiently stabilized or fallen enough to entice many would-be home buyers to take the leap and help the housing market rebound.

Q: So, now the government is lending up to $200 billion to investors holding securities backed by consumer loans. How will this help me get a less expensive loan for a car, or college? And how might it help me get a higher limit on my credit card?

A: Banks and other institutions that provide small business loans and consumer loans issued about $240 billion in securities last year, raising cash from investors to help finance their lending.

But the market for those securities essentially ground to a halt in October. That's left lending institutions without access to cash to make loans. They've responded by lowering credit card limits, tightening standards for who gets a loan, and boosting interest rates.

The government's infusion is designed to get more money to lenders. That's expected to spread benefits throughout the economy by putting it into the hands of consumers, in the form of more available credit and easier mortgage financing. That's key to improving the overall economy, since consumers account for about two-thirds of all spending.

Q: Why did it take so long for the government to start tailoring its bailouts to help consumers more directly?

A: The government has tried to directly help consumers this year — remember the $600 rebate checks we got from the federal stimulus package? But this didn't stop the bleeding — the economy continued to decline.

After the slump deepened in September, many of the subsequent bailouts were short-term steps to prevent immediate failures of banks and money-market mutual funds, whose demise could have deepened the credit crisis beyond what we've seen to date. The beneficiaries of those aid programs underpin a financial system whose functioning is key to the overall economy.